Reference no: EM131829303
The Board of Directors of Whazzup, Inc. is planning the company's intitial public offering (IPO) of common stock. Whazzup's chief financial officer is conducting an analysis to estimate the price at which the stock will trade. It is now January 1, 2002. The company has never paid a dividend, but expects to pay a dividend of $0.75 per share on December 31, 2005 and on December 31, 2006. The dividend is expects to grow by 7% from 2006 to December 31, 2007, and by 5% the following year. Thereafter the dividend is expected to grow by 3% per year forever. Investors require a return of 12% per year on stocks like Whazzup. Management expects to issue 5,000,000 shares.
1. What is the likely initial price for Whazzup's stock as of January 1, 2002?
2. What will be the total market value of Whazzup's common stock as of January 1, 2002?
3. What will the price of the stock be on January 1, 2006, just after the dividend is paid?
4. What will be the price of Whazzup's stock on December 31, 2005 just before the dividend is paid?
5. What rate of return will investors earn on Whazzup's stock between January 1, 2002 and January 1, 2003?
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